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Why are we issuing this paper?
1. This Consultation Paper seeks public comments on the DFSA’s proposals to amend the Prudential — Insurance Business (PIN) Module and the Prudential — Investment, Insurance Intermediation and Banking Business (PIB) Module of the DFSA Rulebook. These proposals encompass:
(a) a prudential framework for DIFC incorporated Insurers proposing to conduct Direct Long-Term Insurance Business from a branch located outside the DIFC (Annex AAnnex A
(b) a change in the underpinning minimum capital for non-captive Insurers (also Annex AAnnex A
(c) a capital adequacy regime for Insurers who wish to write credit insurance, distinguishing between conventional credit insurance and credit enhancement insurance (such as insuring bonds against default); (Annex BAnnex B
Who should read this paper?
2. The proposals in this paper would be of primary interest to Authorised Firms conducting, or Persons proposing to conduct, Insurance Business especially if:
(a) that business is to include Direct Long-Term Insurance Business to be conducted from a branch outside the DIFC;
(b) that business is credit insurance; or
(c) they are, or will be, a member of a Financial Group.
How is this paper structured?
3. In this paper, we set out:
(a) definitions — paragraph 6;
(b) proposals relating to Direct Long-Term Insurance — paragraphs 7–19;
(c) the proposal relating to minimum capital — paragraph 20;
(d) proposals relating to credit insurance — paragraphs 21–23;
(e) proposals relating to group supervision — paragraphs 24–29; and
(f) Associated Prudential PIN and PIB Forms — paragraph 30.
How to provide comments?
4. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.
What happens next?
5. The deadline for providing comments on these proposals is 3 May 2007. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA’s Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens.
Comments to be addressed to:
PO Box 75850
or e-mailed to: firstname.lastname@example.org
6. In this paper, generally, capitalised terms are defined in the GLO Module of the DFSA Rulebook. For convenience, the following terms have the meaning set out below:
(a) "Financial Group" means in relation to an Authorised Firm, any Parent of it incorporated in the DIFC, any Financial Institution Subsidiaries of the Authorised Firm or any of its Parents and any Financial Institution in which the Authorised Firm or any Parent or Subsidiary holds 20% or more of the voting rights or capital. This definition also includes an entity which the DFSA may direct an Authorised Firm to include within its Group.
(b) "Fund" means a Long-Term Insurance Fund established for the purposes of the requirements in the PIN Module; and
(c) "Group" means a group of entities which includes an entity (the "first entity") and:
(i) any Parent of the first entity; and
(ii) any subsidiaries (direct or indirect) of the Parent or Parents in (a) or the first entity.
Proposals relating to Direct Long–Term Insurance
7. In 2006, the DFSA made a policy decision to permit a DIFC incorporated Insurer to write Direct Long-Term Insurance Business, provided that such activities are conducted from a branch located outside the DIFC. Following that decision, we have now developed a regime to address prudential risks to a DIFC incorporated Insurer arising from Direct Long-Term Insurance business conducted from a branch. Annex AAnnex A
sets out the proposed prudential framework.
8. The key aspects of the proposed prudential framework encompass:
(a) modifications to the capital regime (see paragraphs 9–12) and associated reporting requirements (see paragraph 30);
(b) provisions to address risks arising from the inclusion of special features such as guarantees and options in Direct Long-Term Insurance contracts (see paragraphs 13 and 14);
(c) provisions to enable segregation of Direct Long-Term Insurance business conducted from a branch from the other parts of the Insurer’s business (see paragraphs 15 and 16);
(d) augmentation of actuarial reporting requirements (see paragraphs 17 and 18); and
(e) supervision of the branch operations (see paragraph 19).
Modifications to the capital regime
9. The principal change to the regime is the inclusion of a Direct Long-Term Insurance Business component within the risk-based capital regime. This is set out in proposed PIN Rule A4.12.8PIN Rule A4.12.8
, and broadly mirrors the current European regime. The capital component is the sum of:
(a) for most classes of Long-Term Insurance, a percentage of provisions;
(b) where the insurer bears death risk, a percentage of capital at risk, subject to a maximum reduction for reinsurance of 50%;
(c) for certain linked long-term business, a proportion of administrative expenses;
(d) for permanent health insurance, a percentage of premiums or claims;
(e) the assets of a tontine.
10. This is supported by specific valuation requirements relating to the measurement of liabilities of Insurers. These include provisions that prohibit Insurers from treating any contract of insurance as an asset or making any allowance for lapse, surrender, making paid-up or revival of a contract of insurance where that would result in a decrease of liability in respect of that contract. In addition, we also include proposals that require Insurers to take into account reasonable expectations of policy holders relating to bonuses and any other forms of participation, even if they are not vested entitlements. We also include Rules and Guidance relating to the determination of discount rates when assessing yields on assets. See modifications to PIN Rule 5.6.7PIN Rule 5.6.7
11. We also propose to require an Insurer writing Direct Long-Term Insurance to ensure that:
(a) premiums for Direct Long-Term Insurance contracts are sufficient for the formation of technical provisions relating to Future Benefits under those contracts; and
(b) Funds to which Direct Long-Term Insurance contracts are attributed hold Invested Assets of appropriate safety, yield and marketability that is adequate to provide the future Policy Benefits under those contracts.
Inclusion of special features
13. Another aspect of our proposals deals with Direct Long-Term Insurance contracts that include features such as guarantees and options. Such features are likely to expose the Insurer to investment, expense or other risks that are not readily definable at the inception of the contract. To address those risks, we propose that such features can only be included in Direct Long-Term Insurance contracts where the DFSA has given prior written permission for such inclusion. An Insurer seeking such permission must give the DFSA information such as how it intends to price such contracts, value them for the purposes of capital adequacy calculations and also quantify, monitor and manage the risks to its capital adequacy that may arise from such features.
14. Under our proposals, the DFSA may allow or refuse to allow the inclusion of such features in a Direct Long-Term Insurance contract, or permit the inclusion of such terms subject to specified terms and conditions. The DFSA will give reasons for its decision and an Insurer may appeal such a decision to the DFSA’s Regulatory Appeals Committee. See proposed PIN Rule 3.6.1PIN Rule 3.6.1
and PIN Rule 3.6.2PIN Rule 3.6.2
Segregation of Direct Long-Term Insurance Business
15. We are proposing that the DFSA be given a discretionary power to require Insurers conducting Long-Term Insurance Business to create separate Funds for any part of its Business. This would enable the DFSA to require, where appropriate, an Insurer proposing to write Direct Long-Term Insurance from a branch located outside the DIFC to establish a separate Fund to which that part of the business is to be attributed. The DFSA will determine on a case by case basis whether the establishment of a separate Fund is warranted in light of factors such as the relative size and complexity of the branch activities and the associated costs of establishing and maintaining a separate Fund for that Business.
16. We also propose to reduce the underpinning minimum for the Minimum Fund Capital Requirement in respect of a Long-Term Insurance Fund from $10 million to $5 million. This aims to ensure that this figure does not act as a barrier to business, particularly if the DFSA were to require an Insurer to establish multiple Funds. See PIN Rule A8.2.3PIN Rule A8.2.3
Augmentation of the actuarial reporting requirements
17. We also propose to enhance the actuarial reporting requirements taking into account that Long-Term Insurance Business will no longer be confined to reinsurance. Where Direct Long-Term Insurance Business is conducted, the Actuarial report must, under these proposals, set out the information segregated not only by Class of Business but also by each jurisdiction in which such business is conducted (see PIN Rule 7.3.7PIN Rule 7.3.7
18. Actuaries will be required to report on:
(a) any discretionary charges and benefits, options and guarantees, and reversionary bonus entitlements, where such features are included in a contract;
(b) deviations of actual experience compared to the assumptions made in the previous valuation;
(c) the method and assumptions used by the Actuary in the valuation process, including, where relevant, a commentary on significant differences between the assumptions used and recent actual experience of the Insurer;
(d) any expense reserves, mismatching reserves and any other special reserves included by the Actuary in the value of the Long-Term Insurance Liabilities, or recommended by the Actuary to be maintained although not included in the valuation;
(e) a description of the Invested Assets used to determine the riskadjusted yield on which the discount rate used in the valuation was based; and
(f) any significant changes to the matters reported on during the period since the previous valuation, including any significant differences between the assumptions used and the actual experience of the Insurer where relevant and an estimate of the effect of these changes on the Long-Term Insurance Liabilities as at the Reference Date. See additions to PIN Rule 7.3.6PIN Rule 7.3.6
Supervision of branch operations
19. Under these proposals, an Insurer undertaking Direct Long-Term Insurance Business is specifically required to supervise adequately the conduct of its Direct Long-Term Insurance Business in each jurisdiction in which that Insurance Business is conducted. While our proposals do not contain any conduct requirements, since such regulation is a matter for the host state regulator of the branch, an Insurer must ensure that its systems and controls are adequate to fully comply with all regulatory requirements that apply to it. This is because any failure to do so may have an adverse impact on the overall operations of the Insurer’s business including that in the DIFC. We have also included Guidance as to how an Insurer may satisfy this requirement. (See proposed PIN Rule 3.6.2PIN Rule 3.6.2
Proposal relating to minimum capital
20. Separately, we are proposing to reduce the underpinning minimum capital for those Insurers who are not Captive Insurers from its current $100 million to $10 million. This is designed to ensure that this minimum, which is currently higher than in most comparable jurisdictions, does not act as an unnecessary barrier to business in the DIFC. See PIN Rule A4.2.3PIN Rule A4.2.3
. The risk-based variable capital calculation will continue to apply as set out in PIN Rule A4.2.2PIN Rule A4.2.2
, subject to the changes proposed elsewhere in this paper.
Proposals relating to Credit Insurance
21. The proposals relating to credit insurance provide for a capital adequacy regime for insurers who wish to write credit insurance. To do this effectively, we have drawn a distinction between credit enhancement insurance (for example covering bonds against default), and more conventional credit insurance business. The former is mainly written by specialist mono-line insurers, none of which is established in the DIFC. The current proposals do not provide for such specialist mono-line insurers, for whom special provisions would be necessary. If a specialist mono-line Insurer wishes to operate in the DIFC, the DFSA will consider what requirements should apply to it. In the meantime, under these proposals, Authorised Firms will be allowed to undertake small amounts of credit enhancement business as part of their more general credit insurance business.
22. In light of the above considerations, our proposals:
(a) draw a distinction between conventional credit insurance and credit enhancement insurance. We have done this by splitting the current definition of "Credit and suretyship" into "Class 7(a) — Credit" and "Class 7(b) — Suretyship" — See proposed GEN Rule A4.1.3GEN Rule A4.1.3
(c) limit the amount of Class 7(b) insurance that can be written by an Insurer for any reporting period to 5% of the total Gross Written Premium of the Insurer in respect of all classes of non-life business written by the Insurer during that period (see proposed PIN Rule 2.5.2PIN Rule 2.5.2
(d) confine the Persons who can be covered by Class 7(b) insurance to a Body Corporate or a Financial Institution that has at the time of effecting that contract at least a BBB rating given by a recognised Rating Agency (see proposed PIN Rule 2.5.2PIN Rule 2.5.2
(b) and (c));
(f) require an Insurer proposing to undertake Class 7(b) Insurance Business to notify the DFSA in writing before doing so (see proposed PIN Rule 2.5.5PIN Rule 2.5.5
23. In addition to the above, we are proposing a number of minor consequential amendments to the PIN Module to recognise the creation of Class 7(b) insurance.
Proposals relating to Group Supervision
24. We are putting forward proposals to extend our provisions relating to supervision of entities conducting Insurance Business and to bring them into line with the Core Principles of the International Association of Insurance Supervisors.
25. These proposals apply to an Insurer which is a member of a Financial Group, unless it is excluded from these requirements because:
(a) it is already subject to Financial Group prudential supervision by the DFSA due to another member of its Financial Group being an Authorised Firm;
(b) the DFSA has confirmed in writing that it is satisfied that the Insurer’s Financial Group is subject to consolidated prudential supervision by an appropriate regulator; or
(c) the percentage of total assets of the Financial Institutions within the Group, including the Authorised Firm, are less than 40% of the total Financial Group assets, except where the DFSA has expressly directed otherwise (see proposed PIN Rule 8.3.1PIN Rule 8.3.1
26. Our proposals set out how an Insurer which is subject to group supervision must calculate its Financial Group Capital Requirement (see proposed PIN Rule 8.3.4PIN Rule 8.3.4
) and its Financial Group Capital Resources (see proposed PIN Rule 8.3.5PIN Rule 8.3.5
). These provisions provide flexibility in the preparation of accounts by taking into account different regimes that may apply to different entities within the Financial Group. They also contain various safeguards to ensure that a true and accurate picture of the capital adequacy of the Financial Group as a whole is presented. For example, these provisions require an Insurer not to include Capital Resources or Adjusted Capital Resources of Subsidiaries where such Resources exceed the regulatory capital required by the Subsidiary but are not freely transferable within the Financial Group (see proposed PIN Rule 8.3.6PIN Rule 8.3.6
27. An Insurer which is subject to group supervision will have to prepare a six monthly Financial Group Capital Adequacy Report (see proposed PIN Rule 6.6.1PIN Rule 6.6.1
). This report must include specified information relating to the members of the Financial Group, Financial Group Capital Requirement and Financial Group Capital Resources Requirement as set out in the Rules. The Financial Group Capital Adequacy Report, along with a statement by the Insurer’s auditor stating whether any significant matter has come to the attention of the auditor that suggests that the Report has not been properly compiled, must be provided to the DFSA within 4 months of the end of the annual reporting period and within 2 months of the end of the interim reporting period.
28. We already require an Insurer to establish and maintain adequate systems and controls to be able to monitor the effects on the Insurer of its relationship with its Group members and the activities of Group members. This requirement, which will now become PIN Rule 8.2.1PIN Rule 8.2.1
, is to be extended to cover compliance with the Financial Group supervision requirements including funding within the Financial Group and the Financial Group reporting requirements set out above.
Associated Prudential PIN and PIB Forms
30. Proposed changes require certain information to be provided to the DFSA. Accordingly, Annex DAnnex D
sets out various Forms which are to be included in the Prudential (PRU) Module of the DFSA Rulebook to support the proposed changes.
Download this Consultation Paper in PDF formatPDF format.
Download Annex A — Proposed amendments to the Prudential — Insurance Business (PIN) Module of the DFSA Rulebook in PDF formatPDF format.
Download Annex B — Proposed amendments to the General (GEN) Module of the DFSA Rulebook in PDF formatPDF format.
Download Annex C — Proposed amendments to Prudential — Investment, Insurance Intermediation and Banking Business (PIB) Module of the DFSA Rulebook in PDF formatPDF format.
Download Annex D1 — Annual/Quarterly Regulatory Return Form PIN1 — Statement of Financial Position in PDF formatPDF format.
Download Annex D2 — Proposed Amendments to DFSA Rulebook — Prudential Returns Module (PRU) — PIN of the DFSA Rulebook in PDF formatPDF format.